Varex Imaging Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2023; comparisons are to the quarter ended July 1, 2022 and the corresponding prior-year nine-month period. Varex designs and manufactures X-ray imaging components, software and related products for medical and industrial markets.
Key financial results
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $232.2 million | $214.5 million | $666.0 million | $628.0 million |
| Gross profit / margin | $76.3 million / 32.9% | $73.4 million / 34.2% | $212.3 million / 31.9% | $209.0 million / 33.3% |
| Operating income | $24.2 million | $23.0 million | $52.8 million | $63.6 million |
| Net income attributable to Varex | $9.1 million | $8.2 million | $16.3 million | $17.2 million |
| Diluted EPS | $0.21 | $0.20 | $0.40 | $0.41 |
| Operating cash flow | Not provided separately for the quarter | $61.3 million | $(0.2) million |
- Q3 revenue increased 8.3% year over year. Medical revenue rose 5.0% to $175.4 million; Industrial revenue rose 19.8% to $56.8 million.
- For the nine months, revenue increased 6.1%. Medical revenue rose 3.3% to $509.6 million and Industrial revenue rose 16.0% to $156.4 million.
- Margins weakened despite higher sales: Q3 gross margin fell 1.3 percentage points, while the nine-month margin declined 1.4 points. Management cited material costs and unfavorable product mix, partly offset by pricing and stronger sales in selected products.
- Quarterly net income attributable to Varex improved, but nine-month net income and operating income declined. Nine-month operating expenses rose 9.7% to $159.5 million, including higher R&D, compensation, marketing and environmental remediation costs.
Cash, debt and liquidity
- At June 30, 2023, cash and cash equivalents were $118.5 million; cash plus marketable securities not included in cash equivalents totaled $152.5 million.
- Net debt carrying value was $442.9 million, versus $414.4 million at September 30, 2022. Principal debt consisted primarily of $200 million of 4.00% convertible notes due 2025 and $243 million of 7.875% senior secured notes due 2027.
- The asset-based revolving facility was undrawn, with $87.8 million available. Management said cash, operating cash flow and facility availability were sufficient for anticipated needs for at least 12 months.
- Nine-month operating cash flow was $61.3 million, supported primarily by improved receivables collections and lower inventory-related cash outflows compared with the prior year. Investing cash outflow was $30.3 million, including $15.3 million of capital expenditures; financing cash outflow was $1.6 million.
- Inventory was $297.7 million, down from $303.2 million at fiscal year-end. Estimated backlog was approximately $367 million, but orders may be revised or canceled.
Material changes, outlook and risks
- Accounting and dilution: Adoption of ASU 2020-06 eliminated the remaining convertible-debt discount and equity component, increasing reported debt carrying value and changing diluted EPS accounting. In Q3, diluted weighted-average shares were 50.4 million versus 40.5 million a year earlier; the filing included 9.6 million shares for the convertible notes in the diluted calculation.
- Management outlook: No specific revenue, earnings or margin guidance is provided in the supplied filing text. Management reported some improvement in the general economic environment but remained cautious, expecting supply-chain, manufacturing and logistics challenges to continue through 2023. Inflation, labor and materials costs, shipping expense, higher interest rates and currency volatility may pressure margins. The company had raised prices on some products and anticipated further pricing adjustments during fiscal 2023.
- Market and operating risks: Material shortages and supplier delays may impair production and delivery. Varex relies on a limited number of suppliers, including dpiX for detector arrays, and has a $6.5 million remaining 2023 fixed-cost commitment to dpiX. U.S. tariff exclusions affecting certain China-related trade were set to expire September 30, 2023 unless extended.
- Customer concentration: Canon Medical Systems represented 14.8% of Q3 revenue and 16.0% of nine-month revenue, and 12.9% of accounts receivable at June 30, 2023. The ten largest customers accounted for about 52% of quarterly revenue.
- Tax and environmental items: Substantially all U.S. deferred tax assets, net of deferred tax liabilities, remained subject to a valuation allowance. Management noted a possible release in coming quarters if sufficient evidence of future taxable income emerges, but timing and amount are uncertain. The estimated environmental liability for legacy sites increased to $4.2 million from $1.1 million at September 30, 2022, following a $2.9 million estimate adjustment.
- The company reported no material contingent liabilities and no currently pending litigation it believed could materially adversely affect operations or financial position. Disclosure controls were reported effective as of June 30, 2023.
Most important facts for investors to verify
- Whether revenue growth can translate into recovery of gross margins amid materials, labor, mix and pricing pressures.
- Whether supply-chain constraints, supplier concentration and China-related tariffs affect delivery, costs or customer demand.
- Cash generation, inventory and backlog conversion, including the quality and cancellation risk of the approximately $367 million backlog.
- Debt service and refinancing considerations for the 2025 convertible notes and 2027 secured notes, and the potential dilution or cash needs tied to conversion.
- Future tax expense and any timing or magnitude of a possible U.S. deferred-tax-valuation-allowance release.
- Updates to the environmental liability estimate, dpiX commitments and customer concentration.